Were you thinking that the Business Court might, one day, find that a bank owed a fiduciary duty to its customer?  That seemed like it might happen eventually, as the NC Supreme Court seemed to hold out that possibility last year, in Dallaire v. Bank of America, N.A., 367 N.C. 363, 368 (2014), in which it said that:

it is possible, at least theoretically, for a particular bank-customer transaction to give rise to a fiduciary relationship under the proper circumstances.

But on Monday of this week, in RREF BB Acquisitions, LLC v. MAS Properties, LLC, 2015 NCBC 58, Judge McGuire stuck to the long-standing case law in North Carolina that a lender does not owe any fiduciary duties to its customer.  At the same time, however, he also recognized a new cause of action which might have ramifications for claims against any type of entity (not just a lender) which decides to break off negotiations with an opposing party.

The Plaintiff RREF had purchased from BB&T two loans totaling $5.275 million which BB&T had made to the Defendants back in 2005.  It had purchased the loans from BB&T while they were in default, and shortly after BB&T stopped negotiating a forbearance agreement with the Defendants.

No Fiduciary Duty

The Defendants’ lead argument against RREF’s lawsuit to collect on the loans was that BB&T had violated a fiduciary duty it owed to them.  They said that BB&T had breached its duty by failing to disclose its attempts to sell their loans while it was in the midst of negotiating a forbearance agreement with them.

The Defendants claimed that if they had known that BB&T was selling their loans, they would have tried to buy them themselves or had a third party buy the loans on their behalf.

The basis argued by the Defendants for BB&T’s alleged fiduciary duty was that they had a thirty year relationship with a local office, and that they had worked closely with the Bank in developing various residential communities and in selling homes in those communities.  Op. ¶41.  BB&T responded that it owed no fiduciary duties to the Defendants and that it was simply pursuing the options available to it as the holder of loans that were in default.

As Judge McGuire noted, "[t]here is no reported North Carolina appellate case in which a fiduciary relationship has been found in a borrower-lender transaction."  Op. ¶38.  Given that one of the hallmarks of a fiduciary relationship is "a duty of the fiduciary to act in the best interests of the other party," Judge McGuire held that "it would seem nearly antithetical to require a commercial lender to put a borrower’s interest ahead of its own in a business transaction."  Op. ¶41.

Another reason the Court refused to find a fiduciary relationship lay in the restructuring negotiations themselves.  Both the Defendants and the Bank were at this point represented by attorneys and were "negotiating to protect their respective best interests."  (Op. ¶43).  If there ever had been a fiduciary relationship between them, "such relationship ceased once BB&T declared Defendants in default of the Loans and the positions of the parties became adverse."  Op. ¶43.

The New Cause Of Action: Breach Of A Duty To Negotiate In Good Faith

Although it did grant summary judgment on the fiduciary duty claim, the Court nevertheless allowed the Defendants to go forward on a new claim hitherto not formally recognized in North Carolina: breach of a duty to negotiate in good faith.

 

Continue Reading NC Business Court Says That Bank Didn’t Owe A Fiduciary Duty To Its Customer, But Recognizes New Cause Of Action: Breach Of A Duty To Negotiate In Good Faith

After a defendant succeeded on a Motion for a More Definite Statement, a plaintiff added more detail to the claims that had been dismissed.  The defendant responded to the beefed up allegations with a Motion to Strike.

Is that a proper use of a Motion to Strike?  Yes, said Judge McGuire last week in an Order in Progress Point One-B Condominium Association, Inc. v. Progress Point One Property Owners Association, Inc., 2015 NCBC 54, given the nature of the previous dismissal.

You may be surprised at that conclusion, given that a Motion to Dismiss under Rule 12(b)(6) "is generally viewed as the proper means to challenge the sufficiency of a plaintiff’s pleading, not a motion to strike."  Order ¶14.  Motions to strike, under Rule 12(f), are reserved for challenging "any redundant, irrelevant, immaterial, impertinent, or scandalous matter."

The unusual circumstance of this case was that Judge McGuire had dismissed a number of the repleaded claims in a previous decision granting a Motion for a More Definite Statement (2015 NCBC 20).  But he had not said that the dismissal was "with prejudice."  That lack of reference to the quality of the dismissal didn’t make a difference, because Rule 41(b) says that "all dismissals, including those under Rule 12(b)(6) operate as an adjudication upon the merits unless the trial court specifies that the dismissal is without prejudice."  Order ¶9 (quoting Johnson v. Bellinger, 86 N.C. App. 1, 8 (1987).

A Motion to Strike is appropriate "where a party attempts to re-allege claims that have been previously dismissed by the court."  Order ¶9.

So if you are dealing with an adversary who refuses to concede that some of its claims were dismissed and insists on going forward with them, a Motion to Strike is completely warranted.

The Defendants in last week’s decision in DeCristoforo v. Givens, 2015 NCBC 53 were hellbent on getting out from under a settlement they had agreed to at mediation.  They offered a host of challenges to the validity of their agreement, but Judge Gale rejected all of their arguments.

The Parties And The Mediated Settlement

Plaintiff Vivian DeCristoforo was a member of Lindy’s Homemade, LLC  and was its former president and CEO.  She and her husband, also an officer of the LLC, sued the LLC, individually and derivatively.  They made claims for a breach of their employment agreements, Wage and Hour violations, tortious interference with their contracts, and violations of fiduciary duty by the individual defendants (who were officers and directors of the LLC).

The parties engaged in mediation in September 2014.  The Plaintiffs said that all parties had settled the case then, although the Defendants challenged that.  The enforceability of the settlement was the issue before the Business Court.

The settlement was reflected by the Mediation Report form cover sheet signed by all of the parties attending the mediation, and two of the attorneys, stating "that a full and final agreement of all issues was reached."  The terms of the settlement were described on an attached "Exhibit A."  Some of the attending parties put their initials on Exhibit A, but one of the individual defendants (Kaye) left the mediation before Exhibit A was finalized and he did not put his initials on it.

That One Of The Defendants Had Left The Mediation Before The Settlement Was Finalized Was Not A Barrier To Its Enforcement

His departure did not affect the enforceability of this settlement.  Judge Gale said:

[t}he Court is not persuaded by Defendants’ contention that the settlement can be avoided because Kaye left the mediation before initialing the final Exhibit A.  Kaye left, knowing that the reduction or the terms to paper on Exhibit A was in progress.  His counsel was still present.  There is no indication that he instructed that his signature, reflecting a ‘full and final agreement of all issues,’ must be withheld until he further assented to Exhibit A.  Under these circumstances, Kaye and Lindy’s should be bound to the settlement.

Op. ¶48.

We have all had our clients leave a mediation before all the final details of a settlement have been hammered out.  Planes to catch, traffic to avoid.  Maybe sheer boredom.  Still, it is probably not a good idea to have them leave before all t’s and i’s have been crossed and dotted.

The Individuals’ Signatures — Which Had No Mention Of Their Authority To Bind The Entities — Were Sufficient To Bind The LLC And Its Corporate Member

The next question that Judge Gale grappled with was whether the settlement agreement had all of the signatures necessary to bind the parties.  The LLC and its corporate member (Pittco) argued that the signatures of the attendees at the mediation were not sufficient to bind them.  The individuals signing the Mediation Report form did not distinguish whether they were signing in their personal capacities or as representatives of the LLC or its corporate member.

That is contrary to the "nearly universal practice" when transactional documents are involved, which is that "the corporate officer signs twice, once as an officer and again as an individual."  Op. ¶50 (quoting Keels v. Turner, 45 N.C. App. 213, 218, 262 S.E.2d 845, 847 (1980).

Is that the "universal practice" in mediations?  Judge Gale said it was not, writing that:

[o]ften, the time pressures of preparing documents at the end of a long and contentious mediation session require drafting a binding document that does not allow for the same formalities as a transaction completed after multiple document exchanges.  That does not mean, however, that a settlement that the attendees represent to be a full and final resolution of all issues should be easily avoided because of the form of signatures.

Op. ¶50.

So, the Judge concluded that the signatures of the individuals, bearing no reference to their corporate authority, bound both the individual and the corporations they were representing at the mediation. Op. ¶50.

The entities which were Defendants in the DeCristoforo case (the LLC and its corporate member) were hard pressed to argue that the individuals did not have the necessary authority to bind them at the mediation.  Two of the individuals were the members of the LLC’s "Special Matters Committee," which had been granted generally the "plenary power" to resolve DeCristoforo’s claims and specifically to "execute. . . for and on behalf of [Lindy’s] any and all notices, certificates, agreements . . . and other documents or instruments."  One of the Special Matters Committee members also sat on the LLC’s Board of Directors, and was Pittco’s designee to the LLC Board.

The Lack Of An Agreed Upon Release Did Not Invalidate The Settlement

The Defendants’ efforts to evade their settlement did not end here.  They said that the agreement became unenforceable when they were unable to agree on the terms of release following the mediation.  Exhibit A said that there would be "a further statement of. . . complete mutual release." 

The Defendants added terms to the post-mediation release which called for the release of federal claims which were not a part of the Business Court lawsuit and also included terms requiring the Plaintiffs to return corporate documents in their possession, also not mentioned in the terms resulting from the mediated settlement.

Judge Gale found that the language of the Mediation Report was sufficient to release all of the pending claims in the lawsuit and that the voluntary dismissal with prejudice called for by Exhibit A would have the same effect as a release.  Op. ¶57.

 

 

 

Continue Reading Business Court Refuses To Unwind Mediated Settlement Agreement

There’s nothing better than winning a case or a motion in Court and to then follow that up with an award of attorneys’ fees.  On that subject, two rulings in the Business Court last week addressed the award of attorneys’ fees.  In one, the party requesting fees received them.  In the other, fees were not awarded.

Fees For An Inspection Request

If you are moving for the inspection of corporate records for a shareholder, don’t forget that the statute provides for your clients to be paid their fees.  Section 55A-16-04 of the General Statutes provides that the Court "shall also order the corporation to pay the member’s cost (including reasonable attorneys’ fees) incurred to obtain the order unless the corporation proves that it refused inspection in good faith because it had a reasonable basis about the right of the member to inspect the records demanded."

The Plaintiffs in Allcorn v. Bradley Creek Boatominium, Inc. — previously successful on a motion to obtain inspection of the Defendant’s corporate records — moved for an award of attorneys’ fees.

In an unpublished Order last week, Judge McGuire agreed that the Defendant had lacked a reasonable basis to withhold the records, and he awarded the Plaintiffs $14, 620.16 for their fees, the full amount they requested.  The Defendant corporation claimed that it had a good faith basis for refusing to produce its records — that it was concerned that the Plaintiffs would misrepresent the contents of the records — but Judge McGuire did not find that concern to excuse its failure to produce the documents.

Fees For A Voluntarily Dismissed Trade Secrets Case

The outcome wasn’t as positive for the Defendant moving for attorneys’ fees in a trade secrets case, Velocity Solutions, Inc. v. BSG, LLC, 2015 NCBC 51. Section 66-145(d) allows for reasonable attorneys’ fees to be awarded to the "prevailing party" in a trade secrets case "if a claim of misappropriation is made in bad faith or if willful and malicious misappropriation exists."

There have not been any previous decisions in the Velocity case to write about, because Velocity took a voluntary dismissal without prejudice of its case, which included claims for misappropriation of trade secrets, in December 2014.

Whoa.  Are you a prevailing party if the other side takes a voluntary dismissal?  Judge Gale specifically declined to answer that question, finding other reasons to deny the Motion.  Op. ¶44 & n.2.

But Judge Gale did wade into the question of what constitutes "bad faith" under the statute, which the statute does not define.  The courts of other states that have enacted the Uniform Trade Secrets Act (on which the NC law is based), have looked for both "objective speciousness" and "subjective bad faith."  Op. ¶45.  Judge Gale, looking at appellate construction of the term "bad faith" under the unfair and deceptive trade practices statute concluded "there was no indication that our appellate courts would require a determination of subjective bad faith."  Op. ¶47.

The fee request boiled down to the issue of specificity, which is always an issue in pleading a trade secrets claim.  While the Court considered its recent opinions dealing with whether a pleading described the allegedly misappropriated trade secret with enough specificity to avoid a dismissal under Rule 12 (the second DSM Dyneema decision) or to allow discovery to move forward under Rule 26 (the first DSM Dyneema decision), it found that a "third standard" should be applied in considering whether fees are warranted:

whether the pleading was, when filed, devoid of factual or legal sufficiency or was brought or maintained in bad faith for an improper purpose.

Op. ¶51.

Judge Gale found that the Plaintiffs had "an adequate factual and legal basis to form a reasonable, good faith belief in the merits of their claim." and that this reasonable and good faith belief precluded the imposition of sanctions under G.S. §66-154(d).

That good faith belief was supported by Plaintiffs’ affidavits attesting to twenty interviews before filing the Complaint, their review of publicly available information about the Defendant’s product and other investigation.  Op. ¶24.

This probably won’t be the last time that you hear about the Velocity case on this blog.  The Plaintiff has refiled its case, though its new Complaint makes no trade secrets claims.

 

 

Maybe you have the same nightmare that I do.  You have moved to amend your Complaint to add a new defendant.  The statute of limitations is about to run, but your motion to amend was made before the end of the limitations period.  The problem is that you end up getting the Order allowing your amendment after the statute has run.

Is your addition of the new defendant time barred?  You are probably worried, but you might be thinking that the principle of relation back (contained in NC Rule of Civil Procedure 15(c))  will eliminate your concern. 

Judge Bledsoe shed some light on this very dilemma last week, in his Opinion in Insight Health Corp. v. Marquis Diagnostic Imaging of North Carolina, LLC, 2015 NCBC 50.  It turns out that relation back has nothing to do with my nightmare so long as the motion to amend is filed before the expiration of the limitations period.

This wasn’t a groundbreaking step by Judge Bledsoe.  He relied on a NC Court of Appeals opinion more than ten years old, which held that:

the relation back principle only applies where the complaint is amended outside the relevant statute of limitations.  It need not be considered where a pleading is amended before the statute of limitations expires.

Op. ¶14 (quoting Zenobile v. McKecuen, 144 N.C. App. 104, 108, 548 S.E.2d 756, 758, disc. rev. denied, 354 N.C. 75, 353 S.E.2d 214 (2001).

So what is the trigger date for the statute of limitations when a motion to amend is involved?  "The date of the filing of the motion [to amend the complaint to add a new claim], rather than the date the court rules on it, is the crucial date for measuring the period of limitations.  The timely filing of the motion to amend [the complaint], if later allowed, is sufficient to start the action within the period of limitations."  Op. ¶14 (quoting Mauney v. Morris, 316 N.C. 67, 71-72, 340 S.E.2d 397, 400 (1986)(emphasis added).

If you are moving to amend to add a new defendant and you are butting up on the statute of limitations, sleep better on this decision.

There are probably some of you who lie awake at night wondering whether Leagalzoom’s offering of do it yourself lawyering products will be found to be the unauthorized practice of law (UPL) in North Carolina.

For those few of you, that uncertainty will continue.  At the end of last week, Judge Gale issued an opinion in Bergenstock v. Legalzoom.com, Inc., 2015 NCBC 49, dismissing a putative class action by Plaintiffs seeking to represent all North Carolina residents who purchased Legalzoom products or services.  The claims were for UPL, unjust enrichment, and violations of the North Carolina Unfair and Deceptive Trade Practices Act.  Op. ¶28.

The Judge dismissed the complaint, but he did not make a ruling as to Legalzoom’s business model, nor did he address the question whether its services constitute UPL.  The resolution of that issue will have to come in the still pending case brought by LegalZoom against the NC State Bar: LegalZoom.com, Inc. v. North Carolina State Bar.  See here for my last update on that case.

The reason for the dismissal in the Bergenstock case was the full faith and credit given to the settlement of a similar class action in 2012 in California (known as the Webster case).  Webster had sued Legalzoom on behalf of a nationwide class.

The Webster Settlement

The Webster settlement covered all claims:

asserted or that could have been asserted [in that case] arising out of the LegalZoom website, any materials available on or through the LegalZoom website . . . the unauthorized practice of law, or the purchase or use of documents prepared through LegalZoom.

Op. ¶17.

In consideration for the settlement, LegalZoom agreed to provide sixty days of free enrollment in its prepaid legal services Programs.  As Judge Gale described those Programs (known as the LegalZoom Legal Advantage Plus Program [for individuals] and the Business Advantage Pro Program [for businesses]), they involve:

services provided by licensed attorneys, including telephone consultations; review and written summary of legal documents; an annual legal checkup (which would be provided to Webster class members in the free sixty-day period), including a written summary and recommendations for legal documents and strategies; a ten percent discount on all LegalZoom products; access to the LegalZoom form library; electronic document storage; and a twenty-five percent discount on legal services not included under the Programs, but provided by a participating firm.

Op. ¶18.

The challenge presented by the Bergenstock putative class was that those Programs were not available in North Carolina.  (That is true, as the NC State Bar has refused to approve the Programs.  That refusal is the subject of litigation between the State Bar and LegalZoom.  Op. ¶20).  The Settlement dealt with members who did not live in states where those Programs were available by providing them with the lesser of (i) $75.00, or (ii) half of the current base price of the document that the class member had purchased from LegalZoom.  Op. ¶19.

The Bergenstock Plaintiffs said that they had not received due process in the Webster settlement because there was no counsel representing their interests and there was no named class representative who had interests in common with them.  They further argued that the California Court approving the settlement had not considered the adequacy of the alternative payment to the class members who did not have the LegalZoom payments available to them.  They asserted that the settlement was not entitled to full faith and credit as to them.

Full Faith And Credit To Class Action Settlements

The main road block faced by the Plaintiffs challenging the effect of the Webster settlement lies in a U.S. Supreme Court decision holding that:

a judgment entered in a class action, like any other judgment entered in a state judicial proceeding, is presumptively entitled to full faith and credit.

Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 374 (1996), under 28 U.S.C. § 1738 (2014).

The North Carolina appellate courts have accordingly held that courts should:

apply only a “very limited” scope of review when determining whether a foreign judgment is entitled to full faith and credit, with the inquiry limited to whether jurisdictional and due process considerations were “fully and fairly litigated and finally decided” by the court rendering judgment.

Op. Par. 32 (citing Boyles v. Boyles, 308 N.C. 488, 491, 302 S.E.2d 790, 793 (1983); Moody v. Sears Roebuck & Co., 191 N.C. App. 256, 275–76, 664 S.E.2d 569, 581–82 (2008).

If the out-of-state court found  jurisdiction and due process to have been "fully and fairly litigated" and they were finally decided, a "North Carolina court extends full faith and credit without further inquiry."  Op. ¶32.

The Bergenstock Plaintiffs argued that the California court had not specifically considered the adequacy of the settlement amount paid to persons living in states where LegalZoom’s programs were not offered and that they therefore had not been afforded due process.

Judge Gale refused to accept that argument, holding that:

the record does not allow for this parsing of the settlement consideration. The full settlement consideration, including the consideration provided to the Alternative Payment Plaintiffs, was before Judge Highberger [the California Judge approving the settlement] for his review. The Court cannot infer that Judge Highberger failed to consider the adequacy of representation of or the adequacy of consideration for the Alternative Payment Plaintiffs merely because he did not make express findings in that regard. He made findings that the overall settlement was fair and reasonable and that the Settlement Class had been adequately represented. The Court then must conclude that the issues Plaintiffs now seek to litigate in this Court were fully and fairly litigated and finally decided by Judge Highberger.

Op. ¶41.

I said yesterday that there was too much in DSM Dyneema, LLC v. Thagard, 2015 NCBC 47 for just one post, so here are the rest of the key points from the case.  They involve two claims you might not want to bother to make in North Carolina — the first one suing a former employee for violation of fiduciary duty — and the second a claim resting on the "inevitable disclosure doctrine."

Uncertainty About The Availability Of The Inevitable Disclosure Doctrine

Beware of relying on the "inevitable disclosure doctrine."  Judge Bledsoe points out that the doctrine "has not yet been firmly adopted by the North Carolina courts."  Op. ¶20 & n.4.  I think of the inevitable disclosure argument as an end run for a client which didn’t get a non-compete agreement from a departing employee but wished that it had. 

The NC Court of Appeals, although it has yet to accept the doctrine, has described it as applying:

when an employee who knows trade secrets of his employer leaves that employer for a competitor and, because of the similarity of the employee’s work for the two companies, it is "inevitable" that he will use or disclose trade secrets of the first employer. See K. Roberson, South Carolina’s Inevitable Adoption of the Inevitable Disclosure Doctrine: Balancing Protection of Trade Secrets with Freedom of Employment, 52 S.C.L. Rev. 895 (2001).

Op. ¶20 & n.4 (quoting Analog Devices, Inc. v. Michalski, 157 N.C. App. 462, 470, 579 S.E.2d 449, 454 (N.C. Ct. App. 2003).

Judge Bledsoe was able to avoid deciding whether the doctrine applies in NC, even though the Defendants argued on their Motion for Judgment on the Pleadings that the Plaintiff had pled little more than that its former employee had left its employment and would inevitably disclose its trade secrets to his new employer, a competitor.

The Judge found that there was more than just the "inevitability" of disclosure since the Defendants after hiring away Thagard (Plaintiff’s former chief scientist and "technical leader"), were suddenly able to pass a ballistics test for combat helmets used by the Department of Defense.  Before that hiring, the Defendants and all of the Plaintiff’s other competitors, had failed that test.  Plaintiff had the only process in its industry which yielded an acceptable helmet.  There were also allegations in the Complaint that Thagard had downloaded trade secret information from his company computer before leaving the Plaintiff, and that he had disclosed that information to the Honeywell Defendants.

So, before making a claim based solely on the inevitable disclosure doctrine, take into account that North Caroline may not recognize the doctrine.

Fiduciary Duty

This second DSM Dyneema decision also contains a completely unsurprising ruling that Defendant Thagard did not owe a fiduciary duty to his former employer.

The NC Supreme Court pretty much ruled that an employee has no fiduciary duty to its employer almost fifteen years ago, in Dalton v. Camp, 353 N.C. 647, 652, 548 S.E.2d 704, 708 (2001).

Judge Bledsoe rejected the Plaintiff’s argument that Thagard owed it a fiduciary duty because "he held a position of trust and confidence  at DSM as Application Manager — Life Protection in which he. . . was the lead scientist and technical leader for DSM’s helmet and body armor development and new grade development."  Op. ¶28.

It is hard to conceive of  situation where any employee — other than one who is an officer or a director of her employer — would owe a fiduciary duty to her employer.

 

One of the most interesting Business Court decisions of last year was Judge Bledsoe’s opinion in DSM Dyneema, LLC v. Thagard, 2014 NCBC 50, in which he held that the Plaintiff, which was suing for misappropriation of trade secrets,was barred from pursuing discovery because it had not identified its trade secrets with "sufficient particularity."  The alleged trade secrets involved the development of ballistic-resistant fibers for enhanced combat helmets.  If you missed that case, click here.

This week, Judge Bledsoe followed up on that decision by denying the Motion for Judgment on the Pleadings of Defendants Honeywell Specialty Materials, LLC, Honeywell Advanced Composites, Inc., and Honeywell International, Inc.

There is so much worth writing about in this Opinion, DSM Dyneema, LLC v. Thagard, 2015 NCBC 47, that I’ve split it  into two posts.  More tomorrow.

The Honeywell Defendants argued that they were entitled to judgment on the pleadings because the Court had already ruled that the Plaintiff had not identified its alleged trade secrets with the necessary particularity.

While the Court had indeed made that ruling, it pointed out in this second ruling in the case that:

the level of specificity required of a plaintiff to survive a motion for judgment on the pleadings under Rule 12(c) is less than that required to permit discovery into an adversary’s confidential and trade secret information.

Op. ¶18.

Adequately Pleading A Trade Secrets Claim

If you are hoping that this case provides a road map for an adequate trade secrets description in a case involving manufacturing/technical type trade secrets, you are bound to be disappointed.  Judge Bledsoe merely measured the allegations in the amended complaint against other cases where the trade secret description had been ruled to be insufficient, finding the Plaintiff’s allegations to be "more detailed and specific, and less sweeping and conclusory, than those allegations our courts have found to fail the pleading standard of Rule 12."  Op. ¶19.

Nevertheless, the Court’s citation of six Court of Appeals and Business Court decisions finding trade secret allegations to be sufficient to survive a motion to dismiss probably will provide at least some direction to those looking to avoid an early dismissal of a trade secrets claim.  Those cases (which involve mostly customer type trade secrets) are:

Horner Int’l Co. v. McKoy, 754 S.E.2d 852, 859 (N.C. Ct. App. 2014) (holding sufficient under Rule 12(b)(6) plaintiff’s identification of “various raw materials and raw material treatments; extraction, filtration, separation, and distillation techniques; and methods for compounding of flavors, packaging, and plant utility. . . used in the production of flavor materials derived from seven specifically identified substances, such as cocoa, ginseng, and chamomile”);

S. Fastening Sys., Inc. v. Grabber Constr. Products, Inc., 2015 NCBC 40 ¶¶ 23–25 (N.C. Super. Ct. Apr. 28, 2015) www.ncbusinesscourt.net/opinions/2015_NCBC_40.pdf (holding sufficient under Rule 12(b)(6) “confidential customer information such as customer contact information and customer buying preferences and history . . . confidential freight information, sales reports, prices and terms books, sales memos, sales training manuals, commission reports, and information concerning SFS’s relationship with its vendors”);

Veer Right Mgmt. Grp., Inc. v. Czarnowski Display Serv., Inc., 2015 NCBC 12 ¶ 29 (N.C. Super. Ct. Feb. 4, 2015), www.ncbusinesscourt.net/opinions/2015_NCBC_12.pdf (holding sufficient under Rule 12(b)(6) “compilations of information, methods, techniques, and processes that [it uses] in planning, organizing and managing all aspects associated with identifying appropriate shows for their clients, pricing and budgeting, procuring space, setting up booths, staffing booths during the show, tracking sales leads generated by each show, tearing down booths after each show”);

Le Bleu Corp., 2014 NCBC 65 ¶ 29 (holding sufficient under Rule 12(b)(6) “customer lists, pricing information, transaction histories, key contacts, and customer leads”);

Koch Measurement Devices, Inc. v. Armke, 2013 NCBC 48 ¶ 19 (N.C. Super. Ct. Oct. 14, 2013), www.ncbusinesscourt.net/opinions/2013_NCBC_48.pdf (holding sufficient under Rule 12(b)(6) “customer lists, including names, contact persons, addresses, phone numbers . . . [customer] ordering habits, history . . . [and company] pricing and inventory management strategies”); and

TSG Finishing, LLC v. Bollinger, 767 S.E.2d 870, 877 (N.C. Ct. App. 2014)  (recognizing in directing entry of preliminary injunction that particular steps in a process may be trade secrets, not simply the process as a whole).

Op. ¶19.

If you use the descriptions from those cases as a model for your trade secrets complaint, you will stand a pretty good chance of surviving a Motion to Dismiss (at least in Judge Bledsoe’s Court).

Discovery Will Go Forward In This Case

The good news in this decision for the Plaintiff — apart from escaping the Motion to Dismiss — is that it is now entitled to discovery of the Honeywell Defendants’ own trade secrets.

You will remember that the heart of the first Dyneema decision was that the Plaintiff was not entitled to any discovery of the Defendants’ confidential information without describing the trade secrets which Plaintiff claimed had been misappropriated.

That ruling caused me to wonder how a plaintiff in a technical case of this type who claims misappropriation of its trade secrets can ever know exactly which of it proprietary processes have been stolen without having the defendant reveal its own trade secrets.

Now, the Court has shown some understanding of the box in which DSM Dyneema found itself in pursuing its trade secrets claim.  Judge Bledsoe said:

the Court is persuaded that in these circumstances—where DSM reasonably contends that the finished product at issue is ‘the result of a recipe or formula of numerous variables’ and is not publicly available for purchase or inspection, (DSM’s Resp. Honeywell’s Mot. Prot. Order, p. 13), and where the Court finds that the nature of Defendants’ alleged misappropriation creates an inherent difficulty for DSM to identify which portions of its trade secrets have been misappropriated prior to the receipt of discovery from Defendants —the Court concludes that DSM has satisfactorily complied with the Court’s [Order in 2014 NCBC 47] and that the Honeywell Defendants should now be required to produce to DSM their relevant and responsive confidential information and trade secrets.

Op. ¶33.  The Court looked to a Georgia federal court decision recognizing the same difficulty a trade secret plaintiff may face in identifying the trade secrets it says were stolen from it.  In that case, DeRubeis v. Witten Techs., Inc., 244 F.R.D. 676 (N.D. Ga. 2007), the Court held:

[T]he trade secret plaintiff, particularly if it is a company that has hundreds of thousands of trade secrets, may have no way of knowing what trade secrets have been misappropriated until it receives discovery on how the defendant is operating.

Id. at 680.

Coming tomorrow: Whether the inevitable disclosure doctrine applies in North Carolina, and the near impossibility of making breach of fiduciary duty claims against employees.

 

 

I’ve never thought very hard about the remedy of specific performance.  That means ordering a party to a contract to perform its contractual obligations.

But the ability of the Court to order specific performance was front and center in the Business Court’s decision Wednesday in Hilco Transport, Inc. v. Atkins, 2015 NCBC 44.  The Defendants, shareholders of the Plaintiff corporation, argued that the Court could not order specific performance compelling them to sell their shares to the corporation.

One of the Hilco shareholders had the right under the Buy-Sell Agreement to require the family members of his brother, upon the brother’s death. to sell their shares to the corporation.

All of the shareholders were subject to the term of a Buy-Sell Agreement which said in Section 10.1 that "[t]he Stockholders and their successors and assigns shall . . . be entitled to specific performance and injunctive relief to enforce the provisions of this Agreement."

The Buy-Sell Agreement did not specifically give the right of specific performance to the corporation.

When the Defendant shareholders received written notice from the corporation stating that it was exercising its option to purchase their shares, they  refused to allow the redemption.  The corporation sued, demanding specific performance.

The Defendants moved to dismiss, relying on the Latin phrase expressio unius est exclusion alterius.  If your fluency in Latin is fading, that means "the expression of one thing is the exclusion of another," (Order Par. 22).  Given that Section 10.1 of the Buy-Sell Agreement gave the right of specific performance to the shareholders, without mentioning the corporation, the shareholders contended that the corporation did not have that right.

Judge Gale didn’t buy that argument.  He looked at the opening sentence to the paragraph giving the surviving brother the right to buy his deceased brother’s family’s Hilco shares.  The Judge found the language "[n]otwithstanding anything contained in this Agreement to the contrary . . . ." to be significant.

I don’t know if I would have viewed that clause as being determinative, but this observation by Judge Gale about the "special rules" for "interpreting stockholder agreements that limit share transfers" is instructive:

‘restrictions on alienation or transfer of stock are not favored and consequently are strictly construed.’  Averitt v. Ledbetter Roofing & Heating Co. v. Phillips, 85 N.C. App. 248, 251, 354 S.E.2d 321, 323 (1987).  However, such agreements can be upheld where the language is clear, because ‘[w]hile both option contracts and restrictions on the alienation of property interests are strictly construed, the clear intent of the parties as expressed on the face of the contract controls.  Lee v. Scarborough, 164 N.C. App. 357, 360, 595 S.E.2d 729, 732 (2004).

Op. ¶19.

If you think that this ruling means that the Defendants have to tender their shares to the corporation, you are wrong.  There are at least a couple of issues yet to be resolved.  The Defendants are challenging the valuation of their shares, which the Buy-Sell Agreement said was to be the stock’s fair market value as determined by a specified accountant.  There is also a challenge to the validity and enforceability of the Buy-Sell Agreement.

Can you sue an alleged conspirator without suing the other parties to the alleged conspiracy?  That was one of the questions addressed by Judge Gale in the decision last week in  Loftin v. QA Investments LLC, 2015 NCBC 41.

Loftin had invested in an alleged tax shelter product which resulted in a $27 million capital loss deduction which was disallowed by the IRS.  He sued the accounting firm and the law firm which had developed the alleged tax shelter, as well as Defendant QA Investments, the investment advisor which had made the investments in the alleged tax shelter on his behalf.

The accounting firm and the law firm were voluntarily dismissed by Loftin from the case in November 2013.

Motion To Dismiss Conspiracy Claims

QA argued that the civil conspiracy claim against it should be dismissed because its alleged co-conspirators — the accountants and the law firm — were no longer parties to the case.  Judge Gale found whether a case can proceed against only one alleged conspirator to be an interesting question of law.  He said that he had "struggled to find any case law directly address[ing]" the issue.  He denied the Motion "in absence of clear precedent dictating otherwise."  Op. ¶32.

Motion To Dismiss Fiduciary Duty Claims

QA disputed that it owed any fiduciary duty to Loftin, but the Court found Loftin’s allegations of a fiduciary relationship to be "minimally adequate" to survive the Motion to Dismiss.  Op. ¶44.  Judge Gale said that "[m]uch greater specificity would be required by a Rule 56 standard."  Id.

Those "minimally adequate" allegations were that QA had represented that "it would serve as advisor and guardian over his interests with respect to the [alleged tax shelter] transactions, and that QA represented to Loftin that their relationship was a confidential one."  Id.

Motion To Dismiss Unfair And Deceptive Practices Claim

QA prevailed on its Motion to Dismiss the UDPA claim, on the basis that securities transactions are outside the scope of Chapter 75.  That’s pretty well accepted law.  See, e.g, Skinner v. E.F. Hutton & Co., 314 N.C. 267, 274-75, 333 S.E.2d 236, 241 (1985).

The Court rejected, however, QA’s argument that it was engaged in a learned profession and therefore protected from Chapter 75 liability per the statutory language of G.S. §75-1.1(b).  The statute does not extend to "professional services rendered by a member of a learned profession."

Lawyers are acknowledged to be members of a "learned profession" and therefore not subject to Chapter 75 claims (Sharp v. Gailor, 132 N.C. App. 213, 510 S.E.2d 702 (1999).  Given that most of the readers of this blog are lawyers you may bristle at the thought of having "investment advisors" as members of our exclusive club.

But have no worries.  Judge Gale wasted no ink in rejecting this argument, holding that he had:

found no support for QA’s contention that a general ‘investment services’ role constitutes a ‘learned profession’ under Chapter 76.  The Court does not believe that it needs to address that argument any further.

Op. ¶64.

That part of the ruling reminds me of Groucho Marx’s famous letter resigning from the Friars’ Club, when he said "I don’t want to belong to any club that would accept me as one of its members."